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Option Valuation

| | Posted in: Equity Options

How do market makers and sophisticated investors/traders determine option value? In his July 2019 essay entitled "Trading Volatility", Emanuel Derman outlines the history and shortcomings of option valuation as described by the Black-Scholes model, which estimates the value of an option on an asset as a function of the asset's price and volatility. He also addresses extensions of this model. Based on mathematical derivations and his knowledge of option markets, he concludes that:

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